sessions 05_business taxation_an introduction

8/2/2019 Sessions 05_Business Taxation_An Introduction

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Course No. 4135:

K e y W o r d s / O u t l i n e

Taxation

Business Taxation:

An Introduction



Slide 1-2

Issues to be discussed:

Business Enterprises as a Taxpayer

- Sole-proprietorship

- Partnership- Company

Pass-Through vs. Non-Pass-Through

Entities Legal Taxpayer vs. Real Taxpayer



Slide 1-3

Business Enterprise as a Taxpayer

Taxpayer is a person, or business entity or any other organizationwho/which is supposed to pay tax to the Government.

Whether a business enterprise is a taxpayer or not, depends on its form.

Common forms of business enterprises are:

• Sole-proprietorship: 1 owner and fully managed & controlled by thatowner.

• Partnership: more than one owner (at least 2, but not more than 20)and managed and controlled by the partners (being the owners), butsometimes management may be hired.

• Company: more than one shareholder (owner) and there is a divorcebetween management and ownership.

Question regarding whether the entity itself and/or the owners of theentity is(are) taxable is explained on the basis of following two concepts:

• Pass-Through Entity

• Non-Pass-Through Entities



Slide 1-4

Type of Tax-paying Entity:Pass-Through vs. Non-Pass-Through Entities

Pass-Through Entity: This entity is not taxable itself. Income of the entity will passthrough the owners & is taxable after its accumulation with the owner’s other income. Non- Pass-Through Entity: This entity is taxable itself. The income of the entitymay be distributed to the owners and is (or is not) again taxable after itsaccumulation with the owner’s other income.

SOLE-PROPRIETORSHIP: The entity is not taxable for its income [i.e., pass-through entity]. The sole owner of the entity is taxable for the income of the entity,distributed/withdrawn or not. PARTNERSHIP: The partnership firm is taxable for its income in first instance [i.e.,non-pass-through entity]. But if the entity fails to pay tax on its income, then thepartners are individually and jointly liable to pay tax on its income. The share of

income (distributed or not) will be included in the total income of individualpartners, and if the firm has already paid tax on its income, the share of income willbe treated as tax-free income in the individual partner’s hand and it will be subject to

tax rebate at “average tax rate” (ATR). COMPANY: The company is taxable for its income always [i.e., non-pass-throughentity]. The shareholders of the company are taxable for the income of the

company, only if distributed to them (as dividend).



Slide 1-5

Business Entity:Legal vs. Real Taxpayer

Question regarding whether the entity itself is a legal orstatutory taxpayer or it can be able to shift the taxincidence on others or other can be able to shift their taxincidence on the entity is explained on the basis of

following two concepts:

• Legal Taxpayer: The taxpayer whose name isregistered in the tax-authority’s list of taxpayers under

some statutory tax provision.

• Real Taxpayer: The taxpayer whose name may or maynot be registered in the tax-authority’s list of taxpayers

under any statutory tax provision, but practically tax hasbeen shifted on them and tax is being really paid by

them.



Slide 1-6

Business Entity:Legal vs. Real Taxpayer

In this regard, answers to the following queries are important:• Whether the tax incidence can be shifted on others?• Whether the impact of the tax and the incidence of the tax are on same entity?• Whether the impact of the tax on one entity and the incidence of the tax is on

other entity?

Answers to the above queries may be as follows:• Whether the tax is direct (there is no scope of shifting) or indirect (there is

scope of shifting).• In case of income tax (tax on interest income, dividend income, business profit,

capital gain, etc.) and property-related tax (gift-tax), both the impact of the taxand the incidence of the tax are on same entity.

• In case of tax on business transactions/consumption (VAT, supplementary duty,turnover tax), tax on international trade (customs duty, VAT, SD at importstage), in case of tax on production (narcotics duty, VAT and SD), in case of taxon services (excise duty, VAT and SD), the impact of the tax on the entity onwhich the tax is imposed legally under some statutory provision and theincidence of the tax is on other entity or person who are the buyers of thegoods and services from the selling entity.



Slide 1-7

End of the Presentation

Thank you.

sessions 05_business taxation_an introduction

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